July 28th, 2007 by Benjamin Duranske
I’ve been capturing data off of Ginko’s website the last two days, and the numbers do not lie. I am convinced that Ginko Financial is a fraud or is negligently managed. The proof is a little complex, but if you are a Ginko investor, reading this is absolutely worth your time.
At 6:00 PM SLT yesterday, Ginko claimed that it had L$192,378,551 in “Total Deposits.” Three hours later — after a day during which Ginko head ‘Nicholas Portocarrero’ said a “bank run,” occurred — Ginko reported L$194,462,018 in deposits. That means Ginko wants you to believe that its total deposits increased by L$2,100,000 (about US$8000) during the three hours between 6 PM and 9 PM yesterday. That is smack in the middle of the time that most Ginko depositors were actually withdrawing money in a what ‘Portocarrero’ described as a “panic.”
Ginko reported an average of about 59 transactions per hour during this time. That is 177 transactions. So Ginko is asking you to believe that 177 people walked up to Ginko’s ATMs between 6 and 9 PM, in the middle of a bank run, and collectively increased Ginko’s deposit total by 2,100,000 Lindens.
Were you one of those people? Did you deposit a huge amount of money? Do you know anyone who did? Do you know a single person in your whole life who is so stupid that they would have deposited USD $8000 with Ginko last night without making it a loan against some collateral?
I just do not believe it, and if you are a rational person you should not either. My guess is that these 177 people actually took out as much as they could. I was standing around Ginko ATMs talking to people a lot yesterday, and everyone was bitter that they couldn’t withdraw any money. When they were final able to, they took everything they could, and then they kept trying. 177 transactions at the L$5000 limit Ginko imposed all day should have set Ginko back about L$850,000, not netted it L$2,100,000.
But most lies have a small kernel of truth, and that kernel of truth usually helps explain them. Here’s my best guess as to what that kernel of truth is here. Ginko managed to borrow some money against its current assets. That’s what ‘Portocarrero’ told Reuters he was going to try to do (“I’m looking to borrow short term cash using [Ginko assets] as collateral”), so it makes perfect sense that that’s what happened.
I’ll even guess the number. It was $L3,000,000. That covers the roughly L$850,000 that the 177 people who made transactions took, and it accounts for the extra L$2,100,000 that now sits like a big fat stinking lie in Ginko’s “Deposits” column.
And here’s the problem — that’s fraud if they realize what they’re doing, and shockingly negligent if they don’t.
If the L$3,000,000 was an investment against a current asset, it cannot be counted as a “deposit.” I know this is complex, but it’s absolutely correct, and it is incredibly dangerous accounting, for Ginko investors. If they guaranteed that $L3,000,000 loan by promising to give the guy that loaned it to them something else they already owned (a car, part of a second life business, etc.) in the event that they couldn’t pay it back, then it is not a new asset, and it absolutely can not be used to increase the “Total Deposits” number.
If I am right, it means that the number on Ginko’s website for “Total Deposits” can’t be trusted. And if that number can’t be trusted, then none of the numbers there can — and it is only a matter of time before a bank run like today’s is too big for Ginko to get out from under by borrowing more money.
This might still work out okay, for a while. If enough people have abandoned Second Life and left some cash with Ginko, it could easily have enough to weather this storm. If they’re able to keep borrowing against assets and calling the money “deposits,” they can even make things look good.
But if I am right, then it is only a matter of time before that’s not true anymore. You can’t report investments in your company as part of “Total Deposits” and not expect to run out of money pretty quickly, because you are essentially counting one asset as “income” twice. If I am right, it means that the giant number on Ginko’s website — 193 million Linden in total deposits right now, or around three-quarters of a million U.S. dollars — is a farce. And if you have money in Ginko, that better worry you.
For what it’s worth, as of 9:00 AM SLT today, about half of that mysterious “new deposit” money is gone, and withdrawals are still severely limited.
[Update: Ginko has changed the daily withdrawal limit several times, ranging from 5k to 25k, over the last two days. For the most recent limit, check Ginko's website. Note that you cannot see the changes as the old limits are taken off when new ones are put up.]
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